“Industrial properties are not just a rental relationship; they are often areas where millions of lira investments are made and where the heart of the business beats. Therefore, such contracts should not be ordinary but carry a strategic quality.” With this important emphasis by Lawyer Mediator Melis Ilgaz, we discussed the issues encountered in lease agreements regarding industrial properties and the legal matters that need to be considered in this month's legal column of PLASFED Magazine.

Industrial properties, which host the fundamental activities of manufacturers, such as production, storage, and logistics, have critical importance that cannot be evaluated within the scope of an ordinary rental relationship. However, in practice, many manufacturers face serious problems by signing lease agreements without sufficient legal, technical, and financial assessment. The issues that arise in a wide range, from insufficient infrastructure to licensing problems, from risks of early termination to heavy penalty clauses, can disrupt the operations of businesses. They can lead to high costs and legal disputes.

In this interview, we talked with Legal Counsel Lawyer Melis Ilgaz about the crucial points to consider in lease agreements for industrial properties, common legal problems experienced, and the risks encountered in long-term lease relationships. In our interview, we addressed all aspects of the points to consider in renting industrial properties, the risks encountered in long-term agreements, and alternative models such as land leasing.

In general, what kind of problems do manufacturers face in lease agreements in the real estate sector?

Manufacturers can face various problems, especially within the scope of lease agreements in the real estate sector. These problems can involve both legal and commercial risks.

At the forefront are lease agreements signed without conducting the necessary legal, financial, and technical research. Issues regarding infrastructure and common area usage (parking lots, loading areas, etc.) lead to serious problems when the leased property is not suitable in terms of zoning status, environmental permits, work licenses, and the adequacy of electricity, water, and natural gas infrastructure.

Additionally, the failure to detail lease agreements is also a significant problem. Manufacturers can encounter high compensations or penalty clauses when it comes to the termination of a lease agreement due to changes in production capacity, the need to relocate, or economic fluctuations.

Considering all these issues, are lease agreements for industrial properties a matter directly related to not only housing but also production, storage, and commercial activities...? Therefore, should a special lease agreement be arranged for industrial properties?

Absolutely yes. Specially arranged lease agreements for industrial properties are much more critical than classic residential or office rentals. Because these types of properties are the places where fundamental activities such as production, storage, shipment, trade, and workforce management are conducted. Therefore, lease agreements regarding these properties should also be detailed and technical in accordance with this.

One of the most important reasons is that the investments made by the manufacturer in the facility, such as infrastructure, machine installation, and security systems, are very costly. The protection of these investments and clarification of their status at the end of the agreement are necessary.

The purpose of use (manufacturing plant, warehouse, workshop, factory) should cover the zoning status and work license of the property and meet infrastructure and energy requirements. Such technical details are not required in residential leases, but they are critical for industrial use. Furthermore, it should be specified in the contract who will provide this infrastructure (lessor or lessee).

Since the continuity of the lease agreement is also important from the manufacturer’s perspective, the sudden evacuation of the property where the lessee produces can mean losses of millions of TL. Therefore, terms of evacuation, early termination provisions, and penalty clauses should be specifically arranged.

How can the suitability of the leased property for industrial activities be controlled?

Checking whether the leased property is suitable for industrial activities is a critical step for the manufacturer to prevent both legal and practical risks. This suitability should be evaluated not only with the physical state of the structure but also with its conformity to official documents and regulations.

For this, it is essential to evaluate the zoning status document, building occupancy permit, municipal permit, business opening certificate, title deed, and condominium status, as well as compliance with energy and infrastructure and fire and occupational safety regulations. I believe that along with legal assistance, support from experts in the field should also be sought.

What are the essential elements that must be included in lease agreements?

I can list the essential issues that must be included in lease agreements regarding industrial facilities under general headings. Since each industrial company’s needs and the characteristics of the leased location will be different, it should be arranged with special assessment and research. However, I believe that at least looking at them in terms of headings can help in drafting the contract.

In terms of headings, the contract should include the parties' identity and contact information, the address of the leased property, its description and purpose of use, permits, the start date and termination conditions of the lease agreement, rent amount, payment conditions, rent increase rates, deposit (Guarantee) amount, return conditions, maintenance, repair, renovation, additions, constructions and expenses, evacuation conditions and the lessee's exit situation, termination and notice provisions, and insurance obligations.

If it is necessary to vacate before the end of the lease term, what legal risks might arise?

Exiting the leased property before the lease term ends, that is, an early evacuation, may create significant legal and financial risks for the lessee. These risks significantly depend on how the lease agreement is drafted.

If the lessee leaves without a legitimate reason before the contract expires, Article 325 of the Turkish Code of Obligations (TCO) comes into play. According to this article, "If the lessee abandons the lease relationship before the expiration of the contract term, the lessor can request the rent until a new tenant is found for a reasonable period." That is, if the lessee exits early, the lessor has the right to demand the rent until a new tenant is found.

In other words, if the lessor incurs advertising, commission, real estate agency fees to find a new tenant due to early exit, and suffers income loss while the leased property remains vacant, they can also seek compensation for these damages from the lessee. Additionally, there may also be a penalty clause in the agreement. In this case, since the lessee is considered a trader under the Turkish Commercial Code, they may also be obligated to pay that penalty amount.

However, if the eviction is due to a valid reason related to the leased property, for example, the lessor delivering a defective property, force majeure (fire, pandemic, natural disaster), in this case, early exit will be considered "termination for valid reason."

Can an industrial installation be established in the leased property?

An industrial installation can be established in the leased property, but this must be managed carefully both legally and in practice because industrial installations are generally fixed investments. For instance, electrical panels, ventilation systems, machinery foundations, crane tracks, infrastructure lines, etc., can lead to serious disputes between the lessee and the lessor regarding ownership, return, demolition, and similar issues.

Heavy machinery, ventilation systems, and special electrical infrastructure in an industrial facility are often fixed to the property. In some cases, since these can be considered permanent investments, the use of these in the lease agreement and determination of their status at the end of the agreement, repair and insurance costs will need to be established. Otherwise, the industrialist may face the property owner's claim of "unauthorized intervention."

As previously mentioned, the technical criteria for the leased structure, such as electrical infrastructure, ground bearing capacity, fire regulation, must be suitable for the installation. The building's zoning plan, purpose of use, and occupancy permit must be compatible. Therefore, business opening and working permits and municipal permits should also be able to be obtained.

Is a special permit or provision necessary for this? Also, is it possible to recover the investments made at the end of the lease term?

I definitely recommend adding special provisions to the contract. The Investment Authorization Clause must regulate what will happen to the investments at the end of the lease. If the situation of the investments is not regulated at the end of the lease, the TCO will allow the lessee to retrieve their own items without damaging the property. If the renovations and installations can be dismantled without harming the building, the lessee will have the right to reclaim them. However, if the investment has been fully integrated into the structure (for example, a column has been cut, a wall has been broken), it may be considered a part of the property. In this case, the lessor could argue that "the fixed investment is now included in the structure" and therefore will not be returned. For this reason, I recommend that these issues be clearly regulated in the contract.

Are rent increase rates for commercial properties free or limited?

For commercial properties, such as store, warehouse, factory, or office rental contracts, lease increase rates are not entirely free as commonly believed. They are subject to certain restrictions under the Turkish Code of Obligations (TCO). They are limited by a legal upper limit. This limit is determined by the 12-month average of CPI (Consumer Price Index).

How long should lease agreements be made?

Ultimately, the duration of the lease agreement should be determined based on the needs of the parties and the purpose of the property. If both the lessee and lessor have long-term plans, long-term agreements are more appropriate. Short-term agreements provide a more flexible and quick solution. Since industrial companies are assets that contribute to the economy long-term, they generally prefer to make long-term lease agreements. However, they may sometimes need short-term solutions. Typically, they benefit from short-term rentals when constructing their production facility.

Can land be leased instead of a property to establish an industrial facility?

Yes, provided the necessary legal, financial, and technical research is conducted.

What should be considered in the case of land leasing?

A land lease agreement is made between the lessee and the owner over a piece of land or site and must regulate the usage rights over the land. The considerations that must be taken into account in the lease contract for the property must also be observed here.

However, here, the suitability of the land for establishing an industrial facility, construction costs, and ownership of the investment made at the end of the lease term need to be regulated in much greater detail.

Can public land also be leased, or is it only available from private individuals?

Land can be leased from either private or public entities. State-owned lands have also been included in the lease scope. Lands owned by the state treasury can be leased to the public for a 10-year term. The conditions for leasing public lands vary according to the regulations of the relevant public institution (e.g., municipality, treasury, general directorate of foundations, Ministry of Environment, Urbanization and Climate Change, General Directorate of National Estate, etc.) and the characteristics of the property. Generally, open or closed bids are conducted under the Law on Public Procurement No. 2886. In some cases, bargaining methods may also be applied. Therefore, the bidding conditions should be examined in great detail.

What should be considered in long-term lease agreements?

Long-term lease agreements (5 years, 10 years, or more) are particularly critical for the industrial, trade, and logistics sectors. However, these types of agreements also carry economic and legal risks that the parties may not foresee. Therefore, some items in the agreement need to be arranged very carefully, foresightily, and in detail. I believe that they should be considered as potential difficulties that may arise during the course of the contract and at the end of the agreement.

During the term of the agreement, the determination of the rent amount and the rates of increase should be arranged clearly and net so that they do not cause future disputes. There should be arrangements for maintenance and repairs, investments, and modifications to the property throughout the term of the contract.

In the event of termination of the agreement, the status of investments and modifications in the property, the rules to be followed in the event of evacuation and termination, and penalty clauses should also be detailed. For example, in the event of the evacuation of a 20-year industrial facility, it should be regulated what additional installations and renovations will remain and how the evacuation will be carried out.

Another important issue is the possible difficulties that may arise if the property is sold during the lease term. The new owner has the right to initiate eviction proceedings due to need. For this reason, I particularly recommend that our manufacturers have the lease agreement registered in the land registry if a long-term lease agreement is signed.

Translated by Artificial Intelligence